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If it looks like a duck, and quacks like a duck…

... then it probably is a duck – even if masquerading as an emu.

Such, I feel, is a fair summary of the judgment in the latest “lease or licence” case, London College of Business Ltd v Tareem Ltd [2018] – albeit that the learned judge didn’t use those exact words (or anything like them) in his judgment.

The case emphasises, yet again, that the courts are prepared to ignore even the most explicit words of a legal document in interpreting the true nature of that document, whatever label the parties put on it.

The facts

Tareem owned an office complex and over a number of years London College of Business (LCB) occupied offices for its teaching activities under a series of short and simple agreements each of which, in common with the 2012 version under consideration, described itself as a licence and the parties as “Licensor” and “Licensee”. LCB paid a “Licence fee” and a fixed service charge for which it was granted “a personal privilege to use the premises”.

To emphasise the point the draftsperson, presumably working on the principle that if you keep saying something it must be true, added that, “this agreement constitutes a personal Licence to occupy by the Licensee and shall not be deemed to constitute a tenancy within the meaning of the Landlord and Tenant Act 1954…or otherwise”.

Following a dispute over alleged non-payment of service charge, Tareem changed the locks and excluded LCB from the premises. LCB claimed losses amounting to £1 million, subsequently reduced, once things became serious, to a more realistic £189,000. The court was then required to decide whether the occupation agreement really was a licence, which could be terminated under the provisions of the licence agreement.

The decision

The judge decided that the occupation constituted a tenancy and not a licence. He referred to the House of Lords case of Street v Mountford [1985], which laid out the characteristics distinguishing a lease from a licence – essentially that the grant of exclusive possession, for a term, and at a rent, creates a tenancy. Furthermore, the effect of the parties’ arrangement is more important than whether the occupier pays rent or the label that they attach to their agreement.

Tareem relied on the express wording of the agreement to establish that the arrangement was a licence, but the judge took the opposite view. He noted that the purpose of the agreement was to provide LCB with premises from which it could conduct its educational business and, notwithstanding the usual licence term giving Tareem the right to enter, felt that it was not realistic to suppose that the parties genuinely intended that the LCB's business could be interrupted by the exercise by Tareem of a right to enter the premises. “In my judgment”, said the judge, the agreement, “as a matter of substance conferred the right to exclusive possession on the College, and accordingly it took effect as a tenancy”.

Practical considerations

The practical effect of the decision was that the tenancy was a business tenancy subject to the provisions of the Landlord and Tenant Act 1954 and so LCB had a protected tenancy, which could not be terminated without complying with the strict provisions of that Act. It could not just be ended by service of notice under the “licence” agreement.

We are often asked by clients to grant licence agreements which in substance grant exclusive possession of premises – usually in an attempt to deny security of tenure to a tenant. Whilst this case is not new law, it emphasises (once again) that the courts will not be hoodwinked and that they will look through a sham transaction to find the true nature of the arrangement. If the 1954 Act protection is to be avoided in a commercial letting, then the correct procedure to exclude the Act’s provision is to give the required notice, and receive from the tenant the correct form of declaration before the obligation to take the lease arises.

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